CROWDFUNDING PLAN FOR SHARES ADVANCES

In unanimous vote, SEC approves sending the new proposal out for public comment

Startups and small businesses could sell ownership stakes in their companies by soliciting investors over the Internet under a proposal advanced by the Securities and Exchange Commission.

The plan would set rules for equity crowdfunding, which lawmakers said would spur growth by easing financing for startups and small companies when they mandated it in the 2012 Jumpstart Our Business Startups Act. The rules, which the SEC voted 5-0 to release for public comment Wednesday, may boost the nascent crowdfunding movement. Final rules could be approved next year.

Businesses and startups too small or risky to attract funding from banks or venture capitalists are expected to use equity crowdfunding. Regulators say they tried to address concerns that such fundraising will create a channel for fraud by allowing upstart companies to issue illiquid shares to retail investors.

“The proposal before us today appears to offer great promise for providing capital to small businesses so they can survive and hopefully thrive, but it may also provide great risks to investors,” Democratic SEC Commissioner Kara Stein said before the vote in Washington. “If we don’t get it right, I fear that the promise of crowdfunding will be lost.”

The SEC’s proposal, open for public comment for 90 days, becomes the second regulation from the JOBS Act advanced under Chairman Mary Jo White. In July, the agency approved a rule lifting the ban on advertising for investors outside of a public offering, which eased the ability to market directly to accredited investors, or those considered sophisticated and wealthy enough to understand the risks of investing and withstand a loss.

Crowdfunding has drawn wide interest because it will be open to any investor regardless of their income or net worth. Under the proposal, crowdfunding must be done online through an entity that provides investors with forums to ask questions and communicate about a deal.

Under the proposal, people with annual income and net worth of less than $100,000 could invest a maximum of 5 percent of their yearly income. Those with higher incomes could invest up to 10 percent. Companies also would be required to provide information to prospective investors about their business plan and financial condition, as well as a list of their officers, directors and those who own at least 20 percent of the company.

Companies also would be required to provide information to prospective investors about their business plan and financial condition, as well as a list of their officers, directors and those who own at least 20 percent of the company.

Crowdfunding wouldn’t be open to public companies, non-U.S. companies, or those that have no specific business plan, according to an SEC summary of the proposal.